Senator Specter Questions Oil Execs on Big Profits

Washington, D.C. -- May 21, 2008 -- Senator Arlen Specter (R-Pa.), Ranking Member of the Senate Judiciary Committee, today questioned the top oil industry executives on the skyrocketing price of oil at a Senate Judiciary Committee hearing.

In his opening remarks, Senator Specter noted the primacy of the problem:

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Gas prices, May 2008: Photo by aaron@digtialcole (CC)

“We are obviously in a crisis, national, international, with the escalating costs of oil and the intolerable prices of gasoline at the pump. It's important that we bear all of our resources to try to figure out what to do about it.”

Senator Specter directed his questions at top oil industry executives from BP, Shell, Chevron, ConocoPhillips and Exxon Mobil who were in Washington, D.C. to testify in front of the Committee.

"With the consumers suffering so drastically, not only at the pump but big issues on heating oil – for the elderly, especially, in a state like mine, Pennsylvania – don’t you think that gives some cause for wonderment and questioning as to why profits have gone up so high when the consumer is suffering so much?" Specter asked.

A transcript of Senator Specter’s opening remarks and round of questions follow:

SPECTER:

Well, thank you, Mr. Chairman. I’ll just say a word or two.

First, I commend you for holding this very important hearing. We are obviously in a crisis, national, international, with the escalating costs of oil and the intolerable prices of gasoline at the pump. And it's important that we bear all of our resources to try to figure out what to do about it.

It seems to be an intractable problem, but we have to keep trying. And you've assembled a very distinguished group of witnesses here today.

For some time, this committee has been trying to push legislation on eliminating the antitrust exemption for OPEC. They have, for some curious reason under our case law, an exemption from our antitrust laws.

They get into a small room and decide what the supply will be, and that has the inevitable potential, at least, for raising prices.

Senator Kohl and I reported out of committee -- as you know, Mr. Chairman -- have on the floor, ready for action, I would hope that we would get some action on that bill. It certainly couldn't do any harm.

I understand the complexities of the issue on OPEC and the pricing. But at least they ought to be subject to the antitrust laws, to have an impact, if that would be successful.

And then we have to search further. And we've talked about it a lot, and regrettably too little action since the historic gas lines, since 1973 and 1974.

In a conversation I had earlier today with Mr. Hofmeister, talking about a good many of the issues -- and it's extraordinarily complex. So we have to work on it.

One item which caught my attention especially, which is worth mentioning, is the credit card cost. At least, as Mr. Hofmeister outlined it to me, it's a few cents for the companies like Shell, it's, I think, eight cents for the dealer, and 14 cents for the credit card.

Am I quoting you right, Mr. Hofmeister?

HOFMEISTER: That's -- it's -- that's an average number, yes, thank you.

SPECTER: Well, we've been studying this interchange cost for a long time, as to the issue of the credit card companies and what they do. And that sounds like a pretty big bite to me.

But we're all consumed with the problem. And I thank you again, Senator Leahy, for moving ahead on it.

SPECTER: Thank you, Mr. Chairman.

Mr. Simon, there has been substantial publicity about profits of Exxon Mobil. I've taken a look at the trend, and in 2002, Exxon Mobil made $11 billion; 2003, $21 billion; 2004, $25 billion; 2005, $36 billion; 2006, $39 billion; 2007, $40.6 billion. Very, very steep escalation in profits.

Now, that raises a question in the minds of many people, including Arlen Specter, about the scope of those profits. And a lot of talk about taxing excess profits. A lot of talk about oil's benefits.

We're mindful, at the same time, about the cost of exploration. And we're mindful about the problems of tampering with a free market. We want to be very careful we don't cause damage with what looks like a good idea.

But when you take a look from a $11.5 billion in 2002 to $40.6 billion in 2007, with the consumers suffering so drastically not only at the pump but big issues on heating oil -- for the elderly, especially, in a state like mine, Pennsylvania -- don't you think that gives some cause for a wonderment and questioning as to why profits have gone up so high when the consumer is suffering so much?

SIMON: No, absolutely, Senator. And I understand people's concerns about that.

When you look at our profitability, however, I do think it helps, as you point out, to break that down on what makes that up.

When you look at our profitability last year and you look again at the profitability associated with manufacturing the products that we're talking about here, 10 percent of that profitability was associated with our refining and marketing business here in the United States.

To put that into perspective, that's 4 cents on the dollar. To put that 4 cents into perspective, that compares to 7.8 cents on the Dow Jones Industrial, so about half.

The point is, it's not our profitability in this business that's driving the higher price that consumers price; it's the raw materials that we have to purchase on the open market to produce those products for our customers. That's what's driving the higher price.

SPECTER: Well, Mr. Simon, that's a good logical argument.

But is there any merit to those who contend that, given that explanation, that when Exxon Mobil's profits are so high, that there might be some give which would have an impact on the cost of heating oil or on the cost of gasoline at the pump, looking at it on an overall picture?

SIMON: Well, again, when you think about that, Senator, which I understand people saying -- again, when the profitability that we have, it's just 4 cents on the dollar.

The market is working today. The market is working. I understand consumers are feeling the pain, but we are seeing a reduction in demand in this country as a result and we're bringing on more supplies.

When you look at what the industry has projected to bring on stream, and this is the DOE that's made this projection, five additional refineries will come on stream between now and the year 2012 by incrementally expanding existing capacity.

To put that into perspective, that's three more refineries that is needed to meet the projected demand growth.

The point is, the market is working. If we leave the market alone, if we don't additionally tax the industry, if we don't put in place additional mandates, the market will to the benefit of the American consumer.

SPECTER: Let me shift gears to the issue of OPEC, Mr. Robertson, and direct this question to you.

The 13 OPEC countries produce 40 percent of the world's oil supply. Saudi Arabia made an announcement that they were going to increase production by 300,000 barrels by June. At the same time, the other OPEC countries announced that they were going to decrease production by about 390,000 barrels.

A lot of analysis here about the supply talk, about other exploration.

Why shouldn't the OPEC countries be under our anti-trust laws so that a group of companies (sic) can't sit down in a room, 13 companies (sic) decide to lower production, less supply? At least under the traditional laws of supply and demand, that stuff raises prices.

Why should we give them a preferential status in our economy?

ROBERTSON: Well, Senator, I don't support the NOPEC proposal. I don't think that suing foreign governments in our courts will do anything to raise the demand in the world.

I think that engagement in partnerships and talking to these people and spending time with them, I think, is the most important thing.

I think...

SPECTER: Well, the talking hasn't done a whole lot of good.

ROBERTSON: I think the issue...

SPECTER: Vice President Cheney is practically on a commuter line.

ROBERTSON: I think the issue is...

SPECTER: And the president was just there...

ROBERTSON: I know that.

SPECTER: ... came back -- his tank was empty.

ROBERTSON: Yes, sir, I know that.

But I think that the real issue here is more investment in the world. There are many countries that are not making investments, there are many countries that are.

SPECTER: But we can't...

ROBERTSON: We're one of the ones that should be making more investments. But...

SPECTER: I've got less than a minute left. But we can't control that.

ROBERTSON: I don't think we can control OPEC. I don't think it's our place to control OPEC, but I do think that there are significant investments needed in many of the OPEC countries, significant additional investments, because this is all about investment.

There is not much spare capacity in the world. OPEC doesn't have much spare capacity to change the world's supply right now.

SPECTER: Well...

ROBERTSON: So, many of the OPEC countries are making investments, many are not. But we need, across this business, across the world, more investment to increase the supply, and it's not just the OPEC countries.

SPECTER: Well, I'm not sure we can't -- OK, we can't control OPEC, but we might have some impact.

But I think right now OPEC may be doing a pretty good job on controlling us.

ROBERTSON: Senator, I think that it might be negative, the impact...

SPECTER: My red light -- excuse me, excuse me.

ROBERTSON: Excuse me.

SPECTER: My red light is not yet on, Mr. Hofmeister, so I want to come back to an issue we talked about privately in the little time I have remaining about the cost of gasoline at the pump, as you described it to me. How much is attributable to the credit card cost?

HOFMEISTER: Well, I think the credit card rates are set through a particular process by the credit card companies and they are set at a percentage of the retail price.

And so, if you just take that percentage times the retail price, it comes out somewhere in the range of 12 cents to 15 cents a gallon.

SPECTER: And how much is the profit of the gasoline operator at the pump?

HOFMEISTER: Well, for the retail operator, it depends on their cost structure, obviously, and that varies from state to state, from station to station.

But, you know, I think our retailers, generally, are somewhere in the range of, at the low side, 2 cents to 3 cents a gallon, at high side, depending upon the wholesale margins that they're having to pay for, could be in the range of 8 cents to 10 cents a gallon, averaging somewhere around 6 cents to 8 cents.

SPECTER: And how about Shell? What do Shell's profit margins...

HOFMEISTER: The wholesale margins are much thinner than that. And, in some cases, they are just barely profitable margins, sometimes as low as a cent a gallon.

SPECTER: Well, we've been looking at the issue of exchange rates with Visa and MasterCard. It's a pretty bleak picture if you say the credit cards are 12 cents to 15 cents and the dealer at the pump is about 6 cents and the oil companies are about 1 cent. That's a very significant factor that we'll have to look at further.

So, I thank you, gentlemen, for coming in. We really appreciate your being here. And we know it's not easy, but we really want to try find some answer to this if we can.

Thank you, Mr. Chairman.

Source: Senator Arlen Specter